A key challenge in managing operational activities subject to uncertainty, such as manufacturing, procurement, information technology, distribution and logistics, engineering and design, and sales and marketing, is managing the interdependencies between the activities and other related operational activities managed by other organizational entities, both internal and external to the firm, and also subject to uncertainty.
For example, a product line organization within a firm must coordinate its activities with relevant functional teams within the firm, and with external customers and suppliers, creating coordination challenges that are greatly compounded by the impact of multiple sources of uncertainty. The product line organization may learn, for instance, that due to unexpected supply conditions a commodity management team in the firm's procurement organization will not be able to source a sufficient quantity of a required input. As a result, the product line organization may need to re-coordinate with other groups, including commodity management teams responsible for other inputs, internal or external manufacturing partners, relevant sales staff and distribution partners, and one or more customers. Afterward it must revise and re-plan its internal operational activities based on the uncertain outcomes and revisions in plans which result from these interactions.
To facilitate coordination with external partners, in recent years some firms have begun to adopt methods of structuring and managing contractual relationships with external partners. For a general review of research on contracts and relationships in supply chain management, see Cachon, G., “Supply chain coordination with contracts,” Handbooks in Operations Research and Management Science: Supply Chain Management. Steve Graves and Ton de Kok, editors, North Holland, 2003. An explanation of how and why firms may choose to use contingent performance commitments in their relationships with other companies can be found in Johnson, B., “Conceptual and Methodological Differences in Quantifying and Managing ‘Commoditized’ and ‘Non-Commoditized Risks’”, Conference on Integrated Risk Management, Washington University, St. Louis, Mo., June 2004. Descriptions of activities of early adopters of this approach are provided in Van Dam, C., “Supply risk and flexibility management at Agilent”, Parallax View, June 2004, in Vaidyanathan, V., D. Metcalf, and D. Martin, “Using Capacity Options to Better Enable Our Factory Ramps,” Intel Technology Journal, Vol. 9, Issue 3, pp. 185-191, and in Johnson, B., “Optimizing Tool Availability and Lead Time with Procurement Options”, Proceedings of the Thirteenth Annual International Symposium on Semiconductor Manufacturing, San Jose, Calif., September 2005. Capabilities to support buyers in their structuring and analysis of agreements with suppliers are described in U.S. patent application Ser. No. 10/269,794 “System and method for automated analysis of sourcing agreements and performance” (available via the online Patent Application Information Retrieval (PAIR) system of the U.S. Patent and Trademark Office) and in Martinez de Albeniz, V. and D. Simchi-Levi, “Mean-Variance Trade-offs in Supply Contracts”, Naval Research Logistics, Vol. 53, pp. 603-616.
A number of patents exist that describe techniques for facilitating collaboration, both within firms and between firms. Some examples include Button et al., U.S. Pat. No. 7,031,929; Brathwaite et al., U.S. Pat. No. 7,134,096; Notani et al., U.S. Pat. No. 7,039,597; Notani et al., U.S. Pat. No. 6,397,191; Notani et al., U.S. Pat. No. 6,332,155; Notani U.S. Pat. No. 6,119,149; Frees et al., U.S. Pat. No. 6,769,013; Cohen et al., U.S. Pat. No. 6,507,845; Hogge et al., U.S. Pat. No. 5,983,194.
Other patents include Cheng et al., U.S. Pat. No. 6,138,103 which describes a method for production planning in an uncertain demand environment. The method of Cheng et al. incorporates uncertainty in the operational activity of production planning, but does not teach the utilization of structured agreements with counterparties, both internal and external to the firm, to coordinate operational activities with such counterparties, or more specifically the use of Contingent Performance Deliverables for such purpose, as disclosed here.
Firms Break the Overall Management of Their Operational Activities Into Sub-problems
Due to scale and complexity of the overall operational activities of the firm, it is standard practice in nearly all firms to (1) break the activities down into subsets, and assign each to a business unit, team, or functional unit (hereafter an “organizational entity”) to manage, and (2) establish organizational processes for coordinating and managing operational interdependencies between these subsets of activities and the organizational entities responsible for them. The tasks associated with generating suitable agreements between such organizational entities that set forth the rights and obligations of the parties, and which incorporate relevant sources of uncertainty, can be unwieldy. Further, once such rights and obligations contingent on relevant sources of uncertainty have been established, effective joint management of the operational activities and rights and obligations under such agreements is complex, due to the large number of variables and sources of uncertainty involved, and to the interdependencies between them. The analysis and joint management of such activities would be more effective and convenient if suitable tools and resources were available. Such tools and resources include analytical tools to jointly determine the management actions for the operational activities and the actions under the rights and obligations of counterparty relationships which best achieve management objectives.
The present invention is directed to analytical tools to assess uncertainty related to the operational activities and to counterparty relationships, including counterparty actions under those relationships, and to jointly determine the management actions for the operational activities and for rights and obligations under counterparty relationships subject to uncertainty which best achieve management objectives.